Rescuing an airline pays off!

Much has been written about state aid to airlines during the COVID period, but governments ended up with substantial profits.

4 billion in guaranteed loans for Air France (plus 3 billion in shareholder loans from the government), 9 billion for Lufthansa (plus the French government’s 20% stake in the company) – what did we not hear about these floods of public money pouring into the sector?

However, it’s important to reiterate what some people were unable or unwilling to understand at the time: we weren’t just talking about public money. It was mainly private money backed by public money. In short, the banks would lend and if the airlines couldn’t repay, then, and only then, would the government pay instead. This did not happen, even if, as we wrote in the above-mentioned article, we had our doubts about Air France’s ability to withstand such high interest rates. But the issue was resolved by converting part of the loan into bonds.

For the rest, there was public money in the form of a shareholder loan from the French government to Air France, and a stake in Lufthansa for the German government through a state fund.

Indirect benefits for governments

Before returning to the financial aspects of these rescues, we can already say that they have brought indirect benefits to the states concerned. Can you imagine Lufthansa and Air France filing for bankruptcy?

Between the employees concerned and those of their subcontractors and, more broadly, of their ecosystem, the social damage would have been considerable, with all the associated costs.

Secondly, once the crisis was over, this would have greatly penalized the recovery of the tourism sector and even slowed down the overall economic recovery.

That’s how much these loans saved us.

And in terms of revenue, the disappearance of the airlines would have meant a major loss of income from the various taxes they pay.

Air France: early repayment pays off for the French Government

Everything was done to force the airlines to repay as quickly as possible: prohibition on taking a stake in another airline (we saw the result in the ITA takeover), prohibitive interest rates….

Between penalties for early repayment and interest at 7%, Air France would have generated 650 million euros for the French government.

But the bargain may not end there. With the recovery and the record results that follow quarter after quarter, the value of Air France-KLM shares, which have reached abysmal depths, will eventually rise again.

Air France-KLM share price over 5 years

The French State was already a shareholder in the airline, and the bonds subscribed to reduce the repayment burden were subsequently converted into capital, the State could make a handsome profit if it decided to sell all or part of its shares when their price reaches a normal level.

Not only has Air France-KLM been an excellently managed airline since the arrival of Ben Smith, but public finances have also benefited.

The German government’s jackpot

As for Lufthansa, things are simpler. The government took a stake in the airline, promising to exit as soon as the loans had been repaid.

It’s worth noting that in Germany they’re not very keen on public shareholding in businesses, except when it’s vital. Lufthansa has been fully privatized since 1997and has done everything to avoid state interference in its affairs, even in return for COVID aid. Even if it meant filing for bankruptcy (a sort of German Chapter 11) if the quid pro quos demanded were too high.

In the end, Lufthansa did everything in its power to use only a small part of the 9 billion in order to repay it as quickly as possible. The State kept its promise and immediately sold its shares, pocketing a profit of 700 million euros in the process.

Bottom line

In the end, the rescues of Air France and Lufthansa were both directly and indirectly profitable for the French and German governments, and therefore, contrary to popular belief, good operations for public finances.

Image : A220 Air France by kamilpetran via Shutterstock

Bertrand Duperrin
Bertrand Duperrin
Compulsive traveler, present in the French #avgeek community since the late 2000s and passionate about (long) travel since his youth, Bertrand Duperrin co-founded Travel Guys with Olivier Delestre in March 2015.

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